Monday, August 06, 2007

Amazon, in its bid to become the underlying utility of the new web world, today confirmed what had been rumored earlier: a payment service that will compete with PayPal and to some extent, the nascent Google Checkout services.

Just to be clear, Google Checkout and Amazon FPS are not building their own payment service, where PayPal has a clear lead. Instead they are using the credit card infrastructure to enable payments and online transactions.

As a discrete offering, Amazon Flexible Payment Services (still in beta) may seem like a me-too service. However, when juxtaposed against the whole gamut of web services being offered by the company, it is a Trojan horse like strategy, one that can start to eat away at PayPal’s business.

It is not a surprise, that both Google and Amazon want a slice of PayPal’s cake. In the most recent quarter, PayPal had net revenues of $454 million, up 34% over the $339 million reported in Q2-06. More importantly, PayPal Merchant Services transactions jumped 57% to $4.92 billion globally from the $3.13 billion reported in Q2-06.

PayPal has become a defacto standard in the online transactions and payment services, and for anyone to have a chance to beat them there are two options: use money (and price) to lure the eCommerce players, as Google is doing with its Checkout Service. The second option is to offer a developer friendly service, that can allow developers to embed a payment solution into their offerings. Werner Vogels, CTO of Amazon explains it best:

Using a capability called “Payment Instructions” developers can easily create the charging model that works best for them. For example, they can charge customers in small increments until their accumulated balance reaches a limit, pay a percentage of a digital transaction as a royalty, earn a commission on a marketplace transaction, or allow one customer to pay for another customer and limit their usage to a specific amount.

As developers who are already using Amazon’s EC2 and S3 web services start to embed FPS, what they are doing is slowly shifting the momentum away from using PayPal and other rivals. Allowing the buyers to use their Amazon credentials to buy the goods (or services) from these developers, they are also increasing their economic opportunity.

A small web-app developer can now build, host, process and get paid for his efforts right over the Amazon infrastructure, without having to spend money upfront. As Amazon Web Servies team notes on its blog:

Seriously, the 69 million active Amazon.com customers can now use FPS to pay for the applications that you’ll undoubtedly want to build. On the other end, the first wave of FPS applications will be available very soon.